… is from page 47 of Lionel Lord Robbins‘s 1976 book, Political Economy: Past and Present (link added):
It is sometimes argued nowadays that the case for the market economy rests essentially upon the assumption of perfect competition in the sense in which that state of affairs is conceived in mathematical models. This is not so. I am quite sure that if it had been so said to a representative Classical Economist, still more, let us say, to Alfred Marshall who certainly understood the mathematics of the subject, it would have been rejected; and in my opinion rightly so too…. [T]he conception which underlay the Classical commendation of the working of the competitive market economy was something at once less exacting and more comprehensive than this.
DBx: Yes.
Economists such as Adam Smith and Frédéric Bastiat – and Alfred Marshall – understood that information need not be “perfect,” and also that entry and exit into an industry need not be instantaneous, in order for competition to be real and effective at aligning individuals‘ incentives with the public good. In this way, economists‘ pre-1920s conception of competition was far less exacting than are the conditions that constitute the woefully misnamed “theory of perfect competition.” Further, economists‘ pre-1920s conception of competition was more comprehensive than “perfect competition” because scholars such as Smith and Bastiat understood (as Mises, Hayek, Kirzner, and Austrian economists have always understood) that competition is a process that occurs through time and in which entrepreneurs uncover existing imperfections and creatively seek to find ways to earn profits by ‘solving’ these imperfections. Such entrepreneurial search and creativity, and the consequent on-going shrinkage of market ‘imperfections’ and ‘failures,’ are simply absent from mainstream economic theories of competition.
